02 abril, 2013

Two Budgets, One Point of Agreement, and a Third Way


The Senate and House budgets agree that this economy needs more growth and both predict the same growth levels — yet the Senate budget proposes higher spending, taxes, and debt than the House budget. Therein lies an opportunity for the GOP.
Both the House and Senate have published their respective budget proposals. Predictably, Senate Democrats are proposing more spending and tax revenue than House Republicans, who in turn are proposing more deficit reduction than the Senate Democrats. According to Democrats, the House Republicans’ budget is a non-starter because it proposes too much painful, growth-stifling austerity. Conversely, according to Republicans, the Senate Democrats’ budget is a non-starter because it proposes too much painful, growth-stifling taxation and debt. No surprises there, either.

But there is little to no disagreement on at least one point: this economy needs a higher rate of growth, because the economy’s strength will continue to be the ultimate source of funding for anything and everything we decide we want the federal government to do. Growing demands for health care, Social Security, and national security require a growing tax base and a growing ability to supplement taxation with borrowing — and the only source of that funding is a growing economy.
Here, the budget proposals predictably disagree again: the Democrats want the government itself to do more investing to achieve more growth, while the Republicans want the government to enable the private sector to do more investing.
Surprises in the Two Budgets
Curiously, growth rates (see Figure 1) and the size of the economy (GDP) through the next decade are the same in both budgets.
Yet the budgets contain significant differences. How is it that in the Senate budget, spending, taxes, deficits, and debt are higher — but economic growth is not? The Senate budget promises to invest more in education, health care, infrastructure, research, and innovation, which will require more spending than the House budget proposes (see Figure 2).
Are Senate Democrats saying that all the extra investment in their budget will have no effect on economic growth within the ten-year time horizon? If so, the return on their investment is at best disappointing. (Alternately, might the Congressional Budget Office’s “static scoring” be preventing the Senate budget from revealing the true benefits that will accrue? If so, the Democrats might want to rethink their opposition to dynamic scoring.)
The House Republicans’ budget yields the same economic growth as the Senate’s, in spite of smaller tax revenues and reduced spending on many programs that the Democrats label “investments.” That begs a question: if the Republican budget can yield the same economic growth every year with lower spending, tax revenues, and deficits, doesn’t that mean the House budget delivers public goods more efficiently?
The pleasant surprise: because the House budget offers the same economic growth with less spending, House Republicans have an opportunity to spend a little more on worthwhile, growth-friendly programs and on more effective defense, to deliver more robust economic growth and more national security.
The GOP’s Opportunity: Agree to a ‘Compromise’ Goal of Stabilizing the Debt Ratio
The deficit difference between the Senate and House budgets results in a difference in the debt-to-GDP ratio (see Figure 3). The middle ground between those two budget proposals is the opportunity available to Republicans.
Economists are in widespread agreement about one aspect of sovereign debt: a proper goal for a currency-issuing nation such as the United States should be to stabilize the debt-to-GDP ratio at a “safe” level. (What is considered a safe level for the United States is an important topic for debate, but, for argument’s sake, let’s assume it’s something lower than today’s ratio of publicly held debt to GDP — say, 60 percent, a ratio that would almost certainly maintain or strengthen the world’s confidence in U.S. Treasury securities. Holding that ratio steady means it’s perfectly acceptable for the debt to grow at exactly the same rate as the economy grows — in other words, it means that permanent deficits are not a problem.)
The House Republicans’ budget proposes to steadily reduce the debt ratio instead of maintaining it at a safe, constant level. It completely eliminates the deficit by 2023. However, as I’ve previously written, a balanced budget is arguably undesirable in a growing economy. As Warren Buffett has tried to explain, a steady, predictable debt ratio is arguably a superior fiscal goal. And AEI’s John Makin has observed how “the Simpson-Bowles Commission has supplied the framework that would allow the debt-to-GDP ratio to stabilize, signaling a truly long-run sustainable fiscal stance.” The common thread is that stabilizing the debt-to-GDP ratio does not require balancing the budget.
Thus, the House Republicans have the makings of a growth-friendly compromise. Because the House budget delivers more GDP growth per dollar of spending than the Senate budget does (as the numbers stand), the Republicans can sacrifice on the spending side to deliver more growth than the Senate budget does.
The GOP should propose a stable debt ratio, thereby “conceding” on the (inferior) balanced-budget goal. The result: a higher economic growth rate and resulting increased tax receipts.
Will the obsolete rhetoric about a “balanced budget” continue to carry the day, or will we take the better-balanced approach of stabilizing the debt ratio?
Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy.

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